Five Things You Need to Know About ‘Coalgate’

A miner dumped coal into a container in Jaintia Hills, Meghalaya, Feb. 2.

The alleged “scam” over the Indian government’s allocation of coal mining blocks to companies stems from a 110-page draft report by the Comptroller and Auditor General, reported by the Times of India.

India Real Time took a close look at the report in an effort to sift through the industry jargon and explain what this brouhaha is really about. The section that appears to have sparked talk of India’s next mega-scandal comes from a relatively small slice of the document. The CAG report is much more damning about India’s lack of coal production than anything else.

Here are five things you need to know:

Bidding, Baby, Bidding. At its core, the debate is about how India should be allocating a valuable natural resource that is responsible for 50% of the country’s power generation: coal. The report argues that the government has been promising since 2004 to switch from its current approach – more or less giving out coal blocks on a case-by-case basis as companies apply – to competitive bidding. Much like the debate over the allocation of “2G” mobile phone airwaves, the argument here is that auctioning a natural resource is the most transparent, fair way to give it out and is the only way to ensure the government maximizes the value of national assets.

Law and Disorder. Does the government have the power to start auctions of coal blocks now, or does it need to pass a law? There’s a legal tussle over that question. The CAG report claims that the government has been on board with the notion of auctioning coal blocks since 2004. But the auditor seems to say, through some convoluted and awkward passages, that the Coal Ministry has dragged its feet. The government claims it needs to pass legislation to allow auctions; the CAG says auctions could be started by an executive order.

Windfall Winners. The section that appears to have captivated the India media is four pages that discuss “windfall gains to the allocatees” of coal blocks, including big-name Indian companies from the steel, power and cement sectors. That terminology certainly evokes a “scam” of some sort. However, the charges in the report are a bit more sober than you might think. Essentially, it argues that private companies are selling coal at a much higher price than state-run Coal India, giving them big profits. (That is what they refer to as “windfall” gains.) The report is saying, “Hey, if private companies are making that much money, they could be bidding a large amount in auctions.” The logic is sound, but “windfall” may have been a misleading choice of words. If companies influenced the giveaways of coal blocks in a corrupt manner, it would take further investigation to prove – the CAG doesn’t discuss that in this particular report.

Unproductive Producers. The lion’s share of the report doesn’t deal with any of the issues above that have caused such an uproar, but rather India’s coal production shortfall. There’s plenty of blame for Coal India, which produces 81% of the coal in the country and is a lifeline for power generation firms. Between March 2008 and March 2011, Coal India failed to supply 54 million tons of coal it had promised companies. The report also asks why the private companies that have been “captive mines” – the so-called windfall gainers – have been so slow to get going with production. It says only 28 captive coal blocks are producing out of 194 allocated by the government. It is fair to ask why this is the case. Are there delays in getting government clearances, or are companies being inefficient?

Coal Logistics. The CAG report spends a good amount of time on decidedly non-scam-worthy but equally important issues regarding coal. It notes that India has high ash content in its coal reserves compared to countries like Indonesia and needs more washeries to clean it. The CAG also points to a lack of infrastructure like railway rakes to get coal from mines to users such as power plants.

Amol Sharma is an India Correspondent for The Wall Street Journal. Follow him and India Real Time on Twitter @amolsharmawsj and @indiarealtime.